Surveillance Special: Fed Vice Chairman Richard Clarida

events of this week. Yes, we always talk about Richard Claida about the broader scope and scale of economics, but this time is different. As Reinhardt and Rogoff said classically ten years ago, the news flow is extraordinary. Vice Chairman, thank you so much for toomerg. It's important to be in this room. We're in the Magisterial Echoes building. It's

a jewel of nineties architecture. And we are in the special library with all these books, most of them first edition from the private collection of Adolph Miller and others. It's the scope of economics just over your right shoulder, the three volumes of Alan Meltzer. To any of these books in this library matter in the modern economics that we have today. I think they do. Tom you know, contacts is important. Uh, you know whether they say history doesn't repeat, but it rhymes. And I think I'm a

I'm a student to some extent of monetary history. So so, of course, yeah, there's a lot of wisdom in this building, in this room. As they brought us in from security, we looked down in the lobby where FDR dedicated this building. He had some challenges. Chairman Bernanke is of course written exclusively wonderfully I should say about those challenges, and they had a challenge of disinflation and deflation. This challenge we have now is different than then, right, Well, it is different.

Although we are in a world really globally of lower inflation. You see that in the year Zone, you see that in Japan and the US were close to our two percent objective, and that's very important to us. But you're right, there are some important global trends now that are impacting the U S and other countries. Let's begin with this word solid. I think of yelling slack, there's a number of others. Uh, we have a solid economy. What is

a solid economy? Well, look, I think our outlook is really for a sustained economic expansion, Tom, and that's important because as of about a week from now, this will become the longest expansion in US history. We had very strong growth in the first quarter, north of three percent. We could see some moderation and growth this year, but the economy's baseline outlook is good sustained growth, a strong labor market, and inflation near our objective. Then why are

we speaking of cutting interest rates? Well? Because in this environment, Tom, especially in the last six or eight weeks, there have been elevated uncertainty about the outlook. The economy is hitting some cross currents now, there's been a marking down on global growth prospects. There's uncertainty about international trade. There's some evidence that's weighing on sentiment a bit. So we're monitoring that that closely, and we'll act as appropriate to sustain expansion.

I can go four or five ways. Let's let's begin with this new word uncertainty. Uncertainty are non policy shocks. We focus on the trade or we focus on the president, but there's many other shocks out there. Mr Droggy dealing with his shots. Mr Crown and others dealing with actually the Norwegian Bank just yesterday or the day before, raising rates because of the shocks they have. What's the non

policy shock? It matters for the vice chairman. Well, I think that that we really have uncertainty in the sense that there's always some geopolitical uncertainty, but there's also uncertainty about how the global economy navigates at a point, you know, you have negative interest rates in the Eurozone, UH and in Japan. Those countries are are well away from where they want to be UH and I think that is

a factor as as well. When you ran Colombia economic and some would say reinvigorated Columbia economics with your acquisition of talent, there was a demanded Columbia about a study of economic history within our economic history. Have we ever had an American central bank that is central banker to the world because of negative interest rates because of the challenge? Is that's an interesting question Toomas. I'm not surprised from you. I think the FAT has played the dominant role in

central banking throughout most of my professional career. I think perhaps what's a little bit unusual this time is the U the U S is much closer to where it wants to be in terms of both employment and inflation than our other major economies. And because we have a much more globalized capital market than we did forty years ago when I began my studies, that also has an impact as well. That's probably a little bit different than in the past. You know, when I do these interviews,

always bring in the resources of Bloomberg. Let me start with a silence in the press conference, Michael McKee has an important and Chairman Powell gave a graceful answer, but maybe dodge the glide path of what you hope to accomplish. If we have one rate cut, two or even three rate cuts, what does that accomplish for the American economy

given your two percent statistic for growth. Well, first of all, of course, let me remind your viewers that at our most recent meeting we made no adjustment to policy, but we did say that we are monitoring closely the cross currents that are facing the economy and some of these uncertainties. And also, as chair Pal indicated, UH, there was I think broad agreement around the table that the case for

providing more accommodation has increased since our May meeting. Uh, and clearly We're going to be looking and and be very attuned to the incoming data flow. But again, I think the important point Tom about our policy is we have the tools necessary to sustain expansion, a strong labor market and stable prices, and as appropriate, we will deploy those tools to achieve those goals. We welcome all of you again on Bloomberg Radio and Bloomberg Television worldwide conversation

with the Vice Chairman of the FED, Richard Clarata. Our Creig Tourist is not only writing of economics, but he is truly a student of the history of it. As I mentioned before, yelling with the words slack, Clarada with the words solid, Craig Tourist says, how stuck is this Federal Reserve? What are the degrees of freedom you feel you have? Given the global events and given the realities of a boy in a solid American economy, and yet a need for ray cuts? How stuck in a position

is this FED? Well? I admire, Craig. I don't think we're stuck at all. I think, in fact, we have the flexibility that we need that I think some other countries would wish that they would wish that they had uh you know, our primary tool is the federal funds. Right, you know, we're far away from the zero bounds and we certainly have some some room along those lines if we need to, And again we'll act as appropriate. So

I don't think we're stuck at all. And I think again, we have a tool kit, and we have an objective assigned to us by the Congress, and and we're going to do our best to achieve that objective. It was an incredibly important idea of being near the zero bound. And we have one rate cut. I'll get the fifty basis point rate cut in July in a moment I'm sure, I know you don't want to talk about, but is it linear if you cut twenty five basis points fifty then seventy five? Is it a linear effect on the

American economy? Or does it compound? Is there a inertial force? Is there an increasing force? Is you make multiple rate cuts? Well, I think there are a couple of points here. First of all, a lot of our models are are linear, and as someone who wrote down models, I know that. But the real world is nonlinear, and I think as policymakers we factor that in at you know, as we can. So the linear response is the starting point, but in

that room and in that meeting, we're certainly alert to nonlinearities. Yeah. Market economists right now judging Draggy of a few days ago, judging the Polpe press conference, and now judging Richard Claire to Alan Ruskin and Deutsche Meka many others, go, July five really matters a moldy unemployment report. You're gonna tell me it's just one data point. What is the challenge

on July five? If you get a soft a week attempted labor economy report, well, I think here today, then the labor market has been has been strong obviously if you look at payroll games and you look at the unemployment rate on average, we did have a soft print recently. But it's important for your reviewers to no time. We're not looking at any one data point. We get a lot of data. We're getting data on GDP towards the end of July. We'll get data on PC inflation pretty soon. Obviously,

we get a lot of global data. We're looking at the global manufacturing cycle. We're looking at the down down, you know, downward estimates to global growth as well. So a lot of a lot of factors. It's we're not a one note to central bank here, that's for sure. Sometimes we read one re ugget it out research note Vice Chairman, You maybe Mrs rees Orsch note from Barclays where they stun Global Wall Street with the idea of a fifty basis point rate cut in July. I don't

want you to comment on that. I know you want to. I know you're not going to answer the question. But what's important there is the underlying theme, which is these challenges, these uncertainties, these non policy shocks will move from goods producing and manufacturing producing America in Europe and the rest over into the buoyant service sector. Is that a risk? Well, I think there's an evolution and economies evolved, and for the last fifty years we've seen the economy become more

of a service economy. That's true around the world. That's just a trend of global um development. Uh. You know, But again, the U S economy is a complex organism and and overall growth rate is obviously important. But markets are going to work to allocate resources, and we really focus on the overall aggregate picture. You know, it's not the FEDGS job to look at the service sector versus any other a sector. But we're again trying to support

maximum employment of price stability. One of the things that's wonderful about you is you've left a paper trail of academic You must left a paper trail, don't. You've left the paper trill. And there's all sorts of things out there. I like to pick one paper and study it before you when I speak, vice chairman or not vice chairman. Clara Waldman two thousand seven is a brilliant walkthrough of inflation shock. Did you ever think we'd be here where

we're looking the other way? It disinflation ship? Well you know that that you bring that up, Tommy, you're right. That paper was written in two thousand and six and published in two thousand and seven. Uh, And certainly my crystal ball didn't indicate almost anything that has happened in the last dozen years. The interesting thing about that paper, though, is it basically argued that in the old world, the way exchange rates would respond to inflation was to weaken.

And we argued that if you have inflation targeting central banks, incredible central banks, that that correlation can go the other way. And in that paper and other paper since then that is held up in the data. Is credibility at risk? With all the challenges this is historic week from the economics of the of the draggy uh discussion of the delicacy of the Chairman Powell faced in the press conference.

Is credibility of our banking at risk? I don't think so, Tom, you know, and let me explain to your viewers because you have a lot of global viewers on your show. Our mandate is assigned to us by the Congress Instatute in black and wine. The loss as we have a goal and maximum employment, price stability, and we have the independence to set our policy rates in order to achieve

those goals. But we are accountable. We're accountable for our results, were accountable for explaining and trying to explain what we're doing and why we did it. Um, and I don't think our independence is is under threat, and I think we're doing our job, will continue to do our change. And we say this, folks, in honor of Martin Feldstein just this week, a huge loss for this current of my and one of my teachers and manator teachers and

and and truly a mentor. Talking to Rick Michigan, the former governor the other day, a profound linkage of policy with this academics that we have. We are at a moment where we're asking for other people to finally help central bankers. Are we so fiscally constrained right now that you guys feel alone given the growth of the debt and the deficit. Well, let me say this. Let let me say this again. Our mandate is is monetary policy.

So we don't weigh into two fiscal policy. Obviously, we take fiscal policy into account in our outlook and calibrating our appropriate policy response. I do think that we are in a world where we're not just in the US, but around the world. We do need to recognize that there are a lot of important public policy issues that are really fiscal policy issues that are not the purview

of central banks. And I think to the extent that the public feels that the central banks are the solution to every concern about the economy, is is not the correct one. We actually have a pretty narrow mandate, uh, and we tend to focus on that. I have no idea the law or process of demotion at this great institution. I know you don't want to talk about this, but it is in the air in Washingshion. We have a president who speaks his mind by this modern communication method.

How has this building responded to the gossip, the innuendo of a demotion of any given faure time. I can tie and we've known each other for twenty years. We're just doing our job. It helps that we have a very crisp and clear mandate. We have a tool kit, we have an excellent staff. We have twelve Reserve Bank presidents from around the country. We sit around that big

table just across the hall. We have an objective, we have the tools um and we have a very very very very collegial committee and we reach we think good good decision. Mclaria, thank you so much. Thanks for listening to a Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.